the assets of Hazelrigg Risk Management Services and the June 2007 acquisition of the outstanding capital stock of The Schaffer Companies, Ltd. Organizational Structure
The Company's management is structured geographically with regional vice-presidents who report to the President of the Company. Each of these regional vice-presidents is responsible for all services provided by the Company in his or her particular region and for the operating results of the Company in multiple states. These regional vice presidents have area and district managers who are also responsible for all services provided by the Company in their given area and district.
Business Enterprise Segments
We operate in one reportable operating segment, managed care. The Company's services are delivered to its customers through its local offices in each region and financial information for the Company's operations follows this service delivery model. All regions provide the Company's patient management and network solutions services. Statement of Financial Accounting Standards, or SFAS, No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for the way that public business enterprises report information about operating segments in annual and interim consolidated financial statements. The Company's internal financial reporting is segmented geographically, as discussed above, and managed on a geographic rather than service line basis, with virtually all of the Company's operating revenue generated within the United States.
Under SFAS 131, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles of SFAS 131, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas: 1) the nature of products and services, 2) the nature of the production processes; 3) the type or class of customer for their products and services; and 4) the methods used to distribute their products or provide their services. We believe each of the Company's regions meet these criteria as they provide similar services to similar customers using similar methods of productions and similar methods to distribute their services. Summary of Quarterly Results
The Company generated revenues of $77.9 million for the quarter ended September 30, 2008, an increase of $4.3 million or 5.9%, compared to revenues of $73.5 million for the quarter ended September 30, 2007. The increase in revenues was due to an increase in volume across all lines of service.
The continued decrease in the number of jobs in the manufacturing sector and its corresponding effect on the number of workplace injuries that have become longer-term disability cases, the considerable price competition given the flat-to-declining overall workers compensation market, the increase in competition from local and regional companies, changes and the potential changes in state workers' compensation and auto managed care laws, which can reduce demand for the Company's services, have created an environment where revenue and margin growth is more difficult to attain and where revenue growth is uncertain. Additionally, the Company's technology and preferred provider network competes against other companies, some of which have more resources available. Also, some customers may handle their managed care services in-house and may reduce the amount of services which are outsourced to managed care companies such as CorVel Corporation. These factors are expected to continue to limit our revenue growth in the near future.

The Company's cost of revenues increased by $4.1 million, from $54.9 million in the September 2007 quarter to $59.0 million in the September 2008 quarter, an increase of 7.5%. This increase was primarily due to the increase in revenues across the Company's services, especially increases in the lower margin Patient Management services.
The Company's general and administrative costs increased by $1.3 million, from $9.4 million in the September 2007 quarter to $10.7 million in the September 2008 quarter, an increase of 14.1%. This increase is primarily due to the increase in the Company's systems and data interface costs and capabilities including storage, area networks, customer help desk, electronic data interface (EDI), data co-location center, software programmers, and wide area network (WAN).
The Company's income tax expense decreased by $0.4 million, or 12.4%, from $3.6 million, in the September 2007 quarter to $3.2 million in the September 2008 quarter. The decrease in income before income taxes was primarily due to the aforementioned increase in both cost of revenues and general and administrative expenses which resulted in a decrease in income before income taxes. The effective income tax rate was 39.0% in each of the September 2007 and September 2008 quarters.
Weighted diluted shares decreased from 14.1 million shares in the September 2007 quarter to 14.0 million shares in the September 2008 quarter, a decrease of 100,000 shares, or 0.7%. This decrease was due to the repurchase of 155,000 shares of common stock during the September 2008 quarter. The decrease was offset by the exercise of stock options during the quarter.
Diluted earnings per share decreased from $0.40 in the September 2007 quarter to $0.36 in the September 2008 quarter, a decrease of $0.04 per share, or 10.0%. The decrease in diluted earnings per share was due to the decrease in income before income taxes.
Results of Operations for the three months ended September 30, 2007 and 2008 The Company derives its revenues from providing patient management and network solutions services to payors of workers' compensation benefits, auto insurance claims and health insurance benefits. Patient management services include utilization review, medical case management, and vocational rehabilitation. Network solutions revenues include fee schedule auditing, hospital bill auditing, independent medical examinations, diagnostic imaging review services and preferred provider referral services. The percentages of total revenues attributable to patient management and network solutions services for the quarters ended September 30, 2007 and September 30, 2008 are as follows:

                                      September 30, 2007     September 30, 2008
       Patient management services               42.9 %                 44.2 %
       Network solutions services                57.1 %                 55.8 %

The following table sets forth, for the periods indicated, the dollars and the percentage of revenues represented by certain items reflected in the Company's consolidated income statements for the quarters ended September 30, 2007 and September 30, 2008. The Company's past operating results are not necessarily indicative of future operating results.

                                               Three Months Ended        Three Months Ended                            Percentage
                                               September 30, 2007        September 30, 2008           Change             Change

Revenue                                        $      73,510,000         $      77,855,000        $  4,345,000                5.9 %
Cost of revenues                                      54,856,000                58,996,000           4,140,000                7.5 %

Gross profit                                          18,654,000                18,859,000             205,000                1.1 %

Gross profit as percentage of revenue                       25.4 %                    24.2 %

General and administrative                             9,398,000                10,722,000           1,324,000               14.1 %
General and administrative as percentage
of revenue                                                  12.8 %                    13.8 %

Income before income tax provision                     9,256,000                 8,137,000          (1,119,000 )            -12.1 %

Income before income tax provision as
percentage of revenue                                       12.6 %                    10.5 %

Income tax provision                                   3,624,000                 3,173,000            (451,000 )            -12.4 %

Net income                                     $       5,632,000         $       4,964,000        $   (668,000 )            -11.9 %


Weighted Shares
Basic                                                 13,889,000                13,764,000            (125,000 )             -0.9 %
Diluted                                               14,062,000                13,960,000            (102,000 )             -0.7 %

Earnings Per Share
Basic                                          $            0.41         $            0.36        $      (0.05 )            -12.2 %
Diluted                                        $            0.40         $            0.36        $      (0.04 )            -10.0 %

Revenues
Change in revenue from the quarter ended September 2007 to the quarter ended September 2008
Revenues increased from $73.5 million for the three months ended September 30, 2007 to $77.9 million for the three months ended September 30, 2008, an increase of $4.3 million or 5.9%. The increase was primarily due to an increase in the Company's patient management revenues of $2.9 million or 9.0% from $31.5 million in the September 2007 quarter to $34.4 million in the September 2008 quarter and an increase in the Company's network solutions revenues from $42.0 million in the September 2007 quarter to $43.5 million in the September 2008 quarter, an increase of $1.5 million or 3.6%. This increase in revenues is due to an increase in TPA customers and services rendered to existing TPA customer.
The decrease in the nation's manufacturing employment levels, which has helped lead to a decline in national workers' compensation claims, considerable price competition in a flat-to-declining overall market, an increase in competition from both larger and smaller competitors, changes and the potential changes in state workers' compensation and auto managed care laws which can reduce demand for the Company's services, have created an environment where revenue and margin growth is more difficult to attain and where revenue growth is less certain than historically experienced. Additionally, the Company's technology and preferred provider network

competes against other companies, some of which have more resources available. Also, some customers may handle their managed care services in-house and may reduce the amount of services which are outsourced to managed care companies such as CorVel Corporation. These factors are expected to continue to limit our revenue growth in the near future.
The Company believes that referral volume in patient management services and bill review volume in network solutions services may decrease or reflect nominal growth until there is growth in the number of work related injuries and workers' compensation related claims.
Cost of Revenues
The Company's cost of revenues consist of direct expenses, costs directly attributable to the generation of revenue, and field indirect costs which are incurred in the field offices of the Company. Direct costs are primarily case manager salaries, bill review analysts, related payroll taxes and fringe benefits, and costs for independent medical examination (IME) and MRI providers. Most of the Company's revenues are generated in offices which provide both patient management services and network solutions services. The largest of the field indirect costs are manager salaries and bonus, account executive base pay and commissions, administrative and clerical support, field systems personnel, PPO network developers, related payroll taxes and fringe benefits, office rent, and telephone expense. Approximately 48% of the costs incurred in the field are costs which support both the patient management services and network solutions operations of the Company's field operations, such as district managers, account executives, rent, and telephone.
Change in cost of revenue from the quarter ended September 2007 to the quarter ended September 2008
The Company's costs of revenues increased from $54.9 million in the quarter ended September 30, 2007 to $59.0 million in the quarter ended September 30, 2008, an increase of $4.1 million or 7.5%. The increase in cost of revenues was primarily due to the increase in the labor intensive Patient Management revenues and the costs associated with operating the businesses, including labor, rent, telephone, and office supplies.
General and Administrative Costs
Change in cost of general and administrative expense from the quarter ended September 2007 to the quarter ended September 2008 For the quarter ended September 30, 2008, general and administrative costs consisted of approximately 61% of corporate systems costs which include the corporate systems support, implementation and training, amortization of software development costs, depreciation of the hardware costs in the Company's national systems, the Company's national wide area network and other systems related costs. The remaining 39% of the general and administrative costs consisted of national marketing, national sales support, corporate legal, corporate insurance, human resources, accounting, product management, new business development and other general corporate matters. The largest portion of the non-systems portion of general and administrative costs during the September 2008 quarter pertained to accounting, financial reporting and corporate governance.
General and administrative costs increased from $9.4 million in the quarter ended September 30, 2007 to $10.7 million in the quarter ended September 30, 2008, an increase of $1.3 million, or 14.1%. This increase is primarily due to the increase in the Company's systems and data interface costs and capabilities including storage area networks, customer help desk, electronic data interface (EDI), data co-location center, software programmers, and wide area network (WAN). The largest portion of the cost increase was due to the new co-location center.

Income Tax Provision
The Company's income tax expense decreased by $0.5 million, or 12.4%, from $3.6 million for the quarter ended September 30, 2007 to $3.2 million for the quarter ended September 30, 2008 due to the decrease in income before income taxes from $9.3 million to $8.1 million. The income tax expense as a percentage of income before income taxes (i.e. effective tax rate) was 39.0% for each of the three months ended September 30, 2007 and 2008. The income tax provision rates were based upon management's review of the Company's estimated annual income tax rate, including state taxes. This effective tax rate differed from the statutory federal tax rate of 35.0% primarily due to state income taxes and certain non-deductible expenses.
Results of Operations for the Six Months Ended September 30, 2007 and 2008 The following table sets forth, for the periods indicated, the dollars and the percentage of revenues represented by certain items reflected in the Company's consolidated income statements for the six months ended September 30, 2007 and September 30, 2008. The Company's past operating results are not necessarily indicative of future operating results.

                                                Six Months Ended          Six Months Ended                             Percentage
                                               September 30, 2007        September 30, 2008           Change             Change

Revenue                                         $    147,847,000          $    156,056,000        $  8,209,000              5.6 %
Cost of revenues                                     111,012,000               117,264,000           6,252,000              5.6 %

Gross profit                                          36,835,000                38,792,000           1,957,000              5.3 %

Gross profit as percentage of revenue                       24.9 %                    24.9 %

General and administrative                            18,475,000                21,529,000           3,054,000             16.5 %
General and administrative as percentage
of revenue                                                  12.5 %                    13.8 %

Income before income tax provision                    18,360,000                17,263,000          (1,097,000 )           (6.0 %)

Income before income tax provision as
percentage of revenue                                       12.4 %                    11.1 %

Income tax provision                                   7,167,000                 6,732,000            (435,000 )           (6.1 %)

Net income                                      $     11,193,000          $     10,531,000        $   (662,000 )           (5.9 %)


Weighted Shares
Basic                                                 13,927,000                13,790,000            (137,000 )           (1.0 %)
Diluted                                               14,111,000                14,003,000            (108,000 )           (0.8 %)

Earnings Per Share
Basic                                           $           0.80          $           0.76        $      (0.04 )           (5.0 %)
Diluted                                         $           0.79          $           0.75        $      (0.04 )           (5.1 %)

Revenues
Change in revenue from the six months ended September 2007 to the six months ended September 2008
Revenues increased from $147.8 million for the six months ended September 30, 2007 to $156.1 million for the six months ended September 30, 2008, an increase of $8.2 million or 5.6%. The Company's patient management revenues increased $6.0 million or 9.6% from $61.8 million in the six months ended September 2007 to $67.8 million in the six months ended September 2008. This increase was partially due to the acquisition of Schaffer in June 2007 as noted above. The Company's network solutions revenues increased from $86.0 million in the six months ended September 2007 to $88.3 million in the six months ended September 2008, an increase of $2.3

million or 2.6%. This increase was primarily due an increase in the Company's bill review volume over the six months ended September 30, 2007.
The Company's limited revenue increase excluding the aforementioned acquisition of Schaffer reflects the challenging market conditions the Company has experienced during the past few years. The decrease in the nation's manufacturing employment levels, which has helped lead to a decline in national workers' compensation claims, considerable price competition in a flat-to-declining overall market, an increase in competition from both larger and smaller competitors, changes and the potential changes in state workers' compensation and auto managed care laws which can reduce demand for the Company's services, have created an environment where revenue and margin growth is more difficult to attain and where revenue growth is less certain than historically experienced. Additionally, the Company's technology and preferred provider network competes against other companies, some of which have more resources available. Also, some customers may handle their managed care services in-house and may reduce the amount of services which are outsourced to managed care companies such as CorVel Corporation.
The Company believes that referral volume in patient management services and bill review volume in network solutions services will either decrease or reflect nominal growth until there is growth in the number of work related injuries and workers' compensation related claims.
Cost of Revenues
The Company's cost of revenues consist of direct expenses, costs directly attributable to the generation of revenue, and field indirect costs which are incurred in the field offices of the Company. Direct costs are primarily case manager salaries, bill review analysts, related payroll taxes and fringe benefits, and costs for independent medical examination (IME) and MRI providers. Most of the Company's revenues are generated in offices which provide both patient management services and network solutions services. The largest of the field indirect costs are manager salaries and bonus, account executive base pay and commissions, administrative and clerical support, field systems personnel, PPO network developers, related payroll taxes and fringe benefits, office rent, and telephone expense. Approximately 47% of the costs incurred in the field are costs which support both the patient management services and network solutions operations of the Company's field operations, such as district managers, account executives, rent, and telephone.
Change in cost of revenue from the six months ended September 2007 to the six months ended September 2008
The Company's costs of revenues increased from $111.0 million in the six months ended September 30, 2007 to $117.3 million in the six months ended September 30, 2008, an increase of $6.3 million or 5.6%. The increase in cost of revenues was primarily due to the acquisition of Schaffer and the costs associated with operating the business. This was partially offset by the Company improving its field operating productivity in both its patient management and network solutions lines of business.
General and Administrative Costs
Change in cost of general and administrative expense from the six months ended September 2007 to the six months ended September 2008 For the six months ended September 30, 2008, general and administrative costs consisted of approximately 62% of corporate systems costs which include the corporate systems support, implementation and training, amortization of software development costs, depreciation of the hardware costs in the Company's national systems, the Company's national wide area network and other systems related costs. The remaining 38% of the general and administrative costs consisted of national marketing, national sales support, corporate legal, corporate insurance, human resources, accounting, product management, new business development and other general corporate matters.

The largest portion of the non-systems portion of general and administrative costs during the six months ended September 30, 2008 pertained to accounting, financial reporting and corporate governance.
General and administrative costs increased from $18.5 million in the six months ended September 30, 2007 to $21.5 million in the six months ended September 30, 2008, an increase of $3.0 million, or 16.5%. This increase is primarily due to the increase in the Company's systems and data interface costs and capabilities including storage area networks, customer help desk, electronic data interface (EDI), data co-location center, software programmers, and wide area network (WAN).

Income Tax Provision
The Company's income tax expense decreased by $0.5 million, or 6.0%, from . . .